Wednesday, December 12, 2007

Emergency Aid for Money Markets

Bank of England and Fed act to ease crisis

The Guv'n has bottled. All the Guv'ns have bottled. Goodbye prudence. Hello "Moral Hazard."

Posted by talking rot @ 05:10 PM (1411 views)
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11 thoughts on “Emergency Aid for Money Markets

  • Isn’t this just putting off the dreadful day like an unemployed alcoholic living off his/her credit card? It seems that everyday the level of insanity reaches new levels.

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  • I didn’t actually think they would do this. On paper I guess it seems okay. Problem = no cash in system. Solution = print more money. Yer that’s what I used to think when I was a kid in the 70’s. This is going to be a mess. Anyone care to predict the short term effects ?

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  • The banks and the money markets stamp their feet and the DOW drops and all the govnors start to give them what they ask for. Have these idiots forgotten what happens when you give in to toddler tantrums…’moral hazard’ is the least of our worries.

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  • “Significantly, the Bank said it would accept […] mortgage-backed securities in exchange for money.”

    This is a massive change! The banks can now swap their RMBS for cash and they can then issue fresh new mortgages for only the cost of BoE money, not the (much higher) LIBOR cost. This will hand control of mortgage rates to the BoE. It also means the banks can lend more recklessly than ever – prime, subprime, anything! The only restriction is that the RMBS must be AAA-rated – but the banks can buy AAA ratings from monoline insurers, bribe the ratings agencies, or just slice the mortgage pool into tranches and swap the AAA-rated ones.

    God only knows how the BoE expects to get its money back if those RMBS fall flat. The bank – and by extension the taxpayer – is taking on risks greater than the open market is willing to bear. This is a socialist bail-out for capitalist banks (as predicted by others on this site in recent days).

    The change should bring mortgage SVRs down by 0.5% to 1% within a month. The BoE’s market operations – the swaps – will take place on Dec 18th and Jan 15th – expect a lot more news on those dates.

    (Sorry if it’s all a bit technical, but on the surface this looks like a massive change!)

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  • By pumping lots of extra cash into the monetary system won’t they cause the exchange rates (Dollar, Pound, Euro) to drop?

    If exchange rates drop, won’t commodity prices and inflation (from outside the Dollar, Euro, Pound zone) rise?

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  • Not that this comes as a surprise to regulars on this site, but the move underlines just how serious the global banking mess has become. Let us hope that this is contained, otherwise 1 – 0 to Bin Laden, maybe.

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  • So the banks will not lend to each other because they do not trust each other, because each knows that the other will not reveal the extent of the disaster held both within and without their respective balance sheets. So the BOE steps in as the ultimate ‘banker’ (insert your own w) I now pose a few pertinent questions, what is the state of the balance sheet of UK PLC the ultimate holding company of the BOE? does it contain massive and unsupportable debts, perhaps debts that cannot as yet be quantified? does UK PLC have a trading surplus with the rest of the world that can be offset against any funding to be given to businesses of questionable liquidity?

    I seem to recall instances in the past when UK PLC pumped vast sums of paper money into speculative markets in an attempt to preserve what it saw as the status quo, but ultimately failed in a spectacularly disasterous manner. Are we seeing history repeating itself?

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  • Alan – no doubt that’s why it was a coordinated action by the Fed, the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss central bank. By moving together, they can prevent any shifts in the biggest currencies. Yes, commodity prices should now rise further and we can expect to import more inflation from China etc.

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  • Iguana – in 1992 the treasury (not the bank) spent between £27bn of reserves propping up the pound. In today’s announcement the bank said it would offer £11.35bn, which it may never get back if the swapped securities default. You’re right, it’s not that dissimilar!

    Worst of all, the banks probably have a good idea which of their RMBS are most dangerous. Just as a butcher will keep the best cuts for his own family, the banks will keep the safest securities to themselves and give the BoE the ones which smell like they’re about to go off.

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  • The BoE only care about propping house prices up.

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  • I was reading this forum for a while (more than a year) and nothing made me write a comment. However, today I feel like commenting something
    “The BoE only care about propping house prices up”. I’ve seen that technically BoE can do things to keep the prices up (I don’t really understand all the technical explanations in the tread ).
    I want to tell you something I know: BoE ( nobody) can keep the prices UP (and growing). At the end of the day, they need people to buy those houses in order to keep the market going! how can they convince me to pay half of my wages for 30 years just to have a roof above my head? and this is at the actual levels of prices, how about when it will take more than 80% of income for 40 years. Are we all becoming slaves? are they thinking this scam can go on?
    They first tell us that those houses are worth a fortune, after that they “generously” give us money to buy them, and we end up waisting our whole life trying to keep up the payments and hoping that there will be an even more unfortunate person after us, that will pay even more for the house. This is working for a while, but how about when, that person, will have nothing to pay with (100% of his/her entire life ). Does it sound apocalyptic? — well, some time ago I’ve seen someone telling that house prices will be 10X average wages in 2020, at this rate, we can expect in our lifetime, to have 15X in 2040. so 15 years 100% of the earnings. if you add up the interest, it might be 25 years of 100% (nearly 40 years at 80% of income). we will all be slaves in 2050! or more realistic the house will be valuated as any other product (adding up the cost of producing that house ) — that will make a huge difference

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